What will you do with your tax-rebate check?

Feds plan to mail up to $600 per person

Russ Wiles The Arizona Republic Jan. 25, 2008 12:00 AM

Save, spend, invest or pay down debt?

Taxpayers in Arizona and other states have some decisions to make now that Congress and the White House have announced a deal to stimulate the economy with a special $150 billion package of tax rebates and incentives.

Many details remain sketchy, and the plan still must be approved by Congress and signed into law, yet many consumers already are pondering how to use the money.

"I'd do my patriotic duty and spend it," quipped Orest Lechnowsky, a Phoenix attorney, who would use the money to pay for minor home-improvement projects.

Della Everhart, a legal secretary who lives in Phoenix, has put off some dental work and sees the rebate as a way to pay for that.

"It would be really helpful to me," she said.

Congressional and White House officials hope most taxpayers think along those lines and quickly spend their rebates to stoke the economy at a time when recession clouds are forming.

Even so, checks aren't likely to be mailed until April or May.

Although many details are subject to change, a majority of single taxpayers could be in line to receive rebates of up to $600.

Married couples could get $1,200, plus $300 for each eligible child.

The payments are geared to lower- and middle-income Americans, with benefits phasing out for singles earning above $75,000 and married couples making more than $150,000.

An estimated 117 million households could be eligible.

Breaks for business

Other breaks are geared to businesses and include an incentive for making capital investments and more-generous rules to deduct expenses for small businesses.

Bob McGee, president of Southwestern Business Finance in Phoenix, believes that faster deductions for business purchases of real estate or equipment would give many firms an incentive to invest more.

"Over the last few months, businesses have become cautious," he said. "This will encourage them to buy equipment or buildings, and that obviously will have a ripple effect."

James Powers, chief executive officer of iLinc Communications, said his firm probably wouldn't make any new plant or equipment purchases because of the plan.

Even so, the Phoenix-based company could benefit if business customers feel more comfortable about spending on iLinc's products.

"The mood right now is tentative," said Powers, whose firm provides Web-conferencing software and audio-conferencing services. "It could help our clients, which, in turn, would help us."

Jason R. Kaplan, president and CEO of a chauffeured-transportation firm called the Driver Provider, said the ability to depreciate expenses faster could encourage him to buy more vehicles and, in turn, add employees.

"As a small-business owner, it makes it easier to take risks," he said.

Credit-crunch thaw

The plan includes a feature to help thaw the credit-crunch freeze as it affects higher-priced homes.

It would allow Fannie Mae and Freddie Mac, which finance home loans, to buy mortgages this year from lenders above the current $417,000 limit.

"(The increases) should return liquidity to a portion of the mortgage market that has essentially been at a standstill since August," said Kieran Quinn, chairman of the Mortgage Bankers Association.

The stimulus plan aims to perk up the economy, both consumer spending and business investment, at a time when various signals are signaling recession.

Retail sales, for example, dipped 0.4 percent in December compared with November.

The tax plan harks to a previous rebate effort in 2001, which may have softened the blow from a recession that lasted from March to November of that year.

Back then, the government mailed rebate checks in advance of new, lower tax rates that were scheduled to take effect in early 2002.

The tax rebates ranged from up to $300 for single taxpayers to $600 for married couples filing jointly.

But only people with taxable income in 2000 qualified. The new rebates apparently will go to Americans who earned $3,000 or more in 2007.

Lower- and middle-class individuals are more prone to spend the money faster, as Federal Reserve Chairman Ben Bernanke mentioned in recent congressional testimony.

Many questions left

Even so, details are still sketchy enough to cause considerable confusion.

For example, the focus on earned income could disqualify some self-employed people, business partners or retirees, said Jay Payne, a tax partner at BDO Seidman LLC in Phoenix.

He also wondered whether the rebates could be made in the form of electronic payments at a time when the Internal Revenue Service is heavily promoting electronic tax-return filing and electronic refunds in general. Plus, the timing is uncertain.

"It probably will take no less than two months after the bill is passed," Payne said.

Economists are reviewing their notes from the 2001 tax rebates to see if that effort produced much of an impact.

One study, from the National Bureau of Economic Research, estimated that those rebate checks increased total consumption by 0.8 percent in the quarter they were mailed and by 0.6 percent in the following quarter. Bernanke recently estimated that about 60 percent of any rebate money could be spent relatively soon.

The Federal Reserve this week cut two key interest rates by 0.75 percentage point each to boost the economy, yet tax rebates could go to work more quickly once the legislation finally becomes law.

The interest-rate cuts "will be visible only several months ahead," a recent commentary by Northern Trust said.